How the East Coast Avoided an Oil Crunch

Keith Schaefer

Wednesday, 22 Aug 2012 | 2:30 PM ETOilprice

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Last September, Sunoco and ConocoPhillips announced they would both close their Pennsylvania oil refineries.

An oil refinery in Elizabeth, N.J. is shown in this aerial photo of Wednesday, Aug. 29, 2007. Oil prices extended their rise above $78 a barrel Wednesday, Sept. 12, 2007 after finishing at a record close the previous session as a production increase from OPEC failed to calm market concerns about the availability of supplies for winter in the Northern Hemisphere. (AP Photo/Mark Lennihan)

Roughly 330,000 barrels of oil are supplied through the Sunoco refinery in Philadelphia... every day.

Closing of the refineries would have not just resulted in hundreds of lost jobs, but an east coast supply crunch could potentially have occurred.

Fortunately, a solution came to happen — in fact it's a great example of a public/private/labor partnership actually working.

And it all happened over the course of just a few months — a collaboration between the United Steelworkers of America, Pennsylvania Governor Tom Corbett and his team, oil major Sunoco's senior management, and the private equity firm The Carlyle Group.

The result? Hundreds of jobs were saved, industry profits increased, AND a roadmap for reduced air emissions got underway.

The facilities — Philadelphia and Marcus Hook for Sunoco, Trainer for ConocoPhillips — not only kept the region supplied with the fuel it needed … but they accounted for hundreds of direct jobs. The closure of these three refineries would have led to increased unemployment figures and rising fuel prices.

When the United Steelworkers (USW) heard of Sunoco’s announcement to shutter the refineries if buyers couldn’t be found, they sprang into action. Letters were written to politicians and officials to call attention to the situation. After all, it could cause a huge negative impact on the region.

By October, Democratic House Leader Nancy Pelosi had mentioned the closure of the refineries at a White House briefing. But the USW didn’t let the issue fade away and kept up its tireless campaign to raise awareness among the country’s top decision makers. In January, Gene Sperling, President Obama’s top economic advisor, was involved in the process.

The end of February saw a report from the U.S. Energy Information Administration come out that confirmed many people’s fears: The Northeast’s fuel situation would be at serious risk had the refineries been shut down.

As it turns out, that call was a major turning point in keeping the Philadelphia refinery — with its 330,000-barrel-a-day output and its 850 direct jobs — open, according to The Philadelphia Inquirer. During that call The Carlyle Group was identified as a possible buyer for the facility. In addition, the government gave assurances to MacDonald it would do whatever possible to allow a deal to get done.

David M. Marchick, Carlyle’s managing director for external affairs, touched on a point that would be echoed by all sides in the matter when he told The Inquirer, “This is a rare example of federal, state and local officials, business and labor, Republicans and Democrats, all coming together for one common purpose.”

In April, Sunoco announced that it had established an exclusive sales negotiation agreement with Carlyle, and by July the two companies said they would form a joint venture called Philadelphia Energy Solutions, which would keep the plant open. Just days after, USW ratified their contract with a near unanimous vote.

And so, the Philadelphia refinery was saved.

The news of the refineries closing last fall went largely unnoticed by the national media, but it was obviously big news to the USW. And they worked hard to get it on the political agenda—including a candlelight vigil at Pennsylvania Governor Tom Corbett’s mansion.

Lynn Hancock, a USW spokesperson, says that if not for the union, the plant would have been shut down.

“If these facilities had been non-union you wouldn’t have seen this kind of campaign. They probably would’ve been shut down by now,” she said.

Bringing together the stakeholders and the government was an important step, but that didn’t guarantee that a deal would get done.

Hancock said that she knew Carlyle was serious about its offer when they wanted to talk to the union.

“When I heard that they were going to meet with the local union, 10-1, leaders I knew that this was moving and there’s a good chance it was going to result in a sale,” she said.

And when Carlyle and the union did meet to talk about the workers’ contract, both sides worked together to get something done. Ultimately, a three-year contract was negotiated that gave the union a 2.5% raise the first year and a 3% raise in years two and three.

In exchange, the union would give up its defined-benefit pension plan for a 401(k) and allow some union jobs to be performed by contractors.

These negotiations are another example of the cooperative theme that permeated the whole campaign and talks about keeping the facilities open. Hancock emphasized what can be done when business and labor get together:

“It shows that a lot can be accomplished when business works together with its unions. Instead of seeing them as adversaries they should see them as helpmates in improving things and in making businesses stronger,” Hancock’s spokesperson reported.

Private Industry

When Brian MacDonald became the CEO of Sunoco in March of this year, it marked a turning point in the process. Hancock said that MacDonald’s involvement was vital in getting a deal done.

After his meeting with Sperling, MacDonald left a message for Carlyle Managing Director Rodney S. Cohen, who had previously helped save a refinery in Kansas. Having someone with previous experience was likely a big plus in the deal.

After several weeks of negotiations a deal was struck to create a joint venture that would see Sunoco get a one-third, non-controlling stake in the venture, and Carlyle would get control of the 1,400-acre facility. In addition, Carlyle will receive $25 million in state funds to match its $200 million investment in upgrades to the plant.

MacDonald said that the joint partnership was an example of across-the-board cooperation.

“This partnership is a great example of what can happen when motivated people think creatively to solve pressing problems,” he said. “The private sector, government and labor all played important roles in getting this done. This is the best possible outcome for everyone involved: existing jobs will be saved, new jobs will be created and new business opportunities will be given the chance to develop.”

Still, some key technical concerns remained in order for the partnership to succeed. One of the key questions was:

Where would oil come from for the refinery?

Typically refineries in the area have relied on expensive, imported Brent crude. But Carlyle’s investment will open the door for the light shale oil from North Dakota—the Bakken formation—to be shipped in.

Carlyle officials said that plans are in place to connect the facility to the west through a high-speed train unloading facility, which could reportedly handle 140,000 barrels a day.

The Pennsylvania Department of Transportation will reportedly be contributing about $10 million to the effort to extend the rail lines. Dennis Buterbaugh, a spokesman with the Pennsylvania DOT, said that more details will emerge in the coming weeks once Carlyle’s application comes through.

The Bakken won’t be the only play that will be a part of this venture, as the Marcellus shale will also be involved. Carlyle said that it plans to use natural gas from the formation to power the refinery, and also said it would explore the possibility of liquid natural gas at the plant.

Government

Many prominent politicians including Governor Corbett, U.S. Representative Bob Brady and Philadelphia Mayor Michael Nutter were involved. What was impressive about their efforts is that no one took the opportunity to try to get a political “win.”

Corbett, a Republican, decided that even if this project would be good for the Democratic White House in the upcoming election, he would not let so many of his constituents lose their jobs.

“Obviously, if you take it from a political perspective, this is important to the White House. They’re going to be able to count this in an election year… Working together and getting this done was a lot better than seeing this facility shut down,” he said.

Support from these high-level lawmakers was an important factor in the refinery being saved but there was also a great deal of behind-the-scenes effort from local officials and government employees — like Mike Krancer.

Krancer is the secretary of Pennsylvania’s Department of Environmental Protection (DEP), part of a team put together by the governor in December to evaluate what could be done to save the refinery.

Krancer said his job was to make sure all the stakeholders knew the government was here to solve problems, not create barriers.

Once Carlyle was identified as a potential buyer, he said it was important they had confidence in the government to help them through any air permitting issues.

Krancer and key members of his team had spent a large part of their career in the private sector. He said that he knew what it is like to work with stubborn government officials who have no interest in solving problems. By bringing a “can-do” attitude to the table, Krancer helped give Carlyle the confidence it needed to make the investment.

One of the technical keys that made this deal viable for Carlyle, Krancer said, was bringing in Bakken crude, which is lower in sulfur than many other crudes. This light oil leads to lower emissions, so it was a win-win for both the environment and economics.

Another state agency that was on Governor Corbett’s task force was the Department of Community & Economic Development.

Steven Kratz, the department’s press secretary, said that one of the keys for the government’s success in this situation was that it was extremely active, but not visible. This allowed strong bipartisan cooperation within the government.

Kratz said that the project was a “terrific example of … coordination within state government” and a “great example of all levels of government working together.”

While the deal is not yet finalized (that is expected to happen in the third quarter), the example of the Philadelphia refinery should be held up as what can happen when the private sector, labor and government put their heads together to solve energy problems.

—This story originally appeared on Oilprice.com. Click hereto read the orginal story.